Showbox (086980 KQ ) Taking a break after a strong run in 1Q Media Robust 1Q results thanks to the success of A Violent Prosecutor Showbox’s 1Q revenue surged 84% YoY, as the number of admissions to the Results Comment company’s titles increased to 12.48mn in the quarter (vs. 7.41mn in 1Q15). A Violent May 17, 2016 Prosecutor , starring Kang Dong-wo n, attracted a total of 9.7mn viewers. By comparison, Gangnam Blues and Detective K: Secret of the Lost Island sold 2.19mn and 3.87mn box office tickets, respectively, in 1Q15. Intellectual property revenue (Maintain) Buy also improved YoY, as box office hits released in 4Q15, including The Insiders and The Throne , boosted domestic VOD revenue. Target Price (12M, W) 11,000 Operating profit soared 237% YoY. COGS-to-revenue ratio declined 3%p YoY to 80%, and SG&A fell 9% YoY. Net profit jumped 117% YoY. The effective corporate Share Price (05/16/16, W) 8,060 tax rate is estimated at 23%. Expected Return 36% Taking a breather in 2Q, and bouncing back in 3Q with tentpoles 2Q: The lack of major movies slated for release in 2Q should affect operating OP (16F, Wbn) 17 results in the short term. There were no major movie openings in April, and The th Consensus OP (16F, Wbn) 16 Third Way of Love —to be released on May 19 —will likely have a li mited impact on the bottom line, as Showbox is the distributor but not the investor for the film . EPS Growth (16F, %) 9.4 Moreover, as Good Bye Single is scheduled to be released on June 30 th , earnings Market EPS Growth (16F, %) 16.8 will mostly be reflected in 3Q. Meanwhile, domestic VOD revenue related to A P/E (16F, x) 39.5 Violent Prosecutor and A Man and A Woman (released in 1Q) should offset dismal Market P/E (16F, x) 10.6 2Q movie earnings to some extent. KOSDAQ 701.46 3Q: However, Showbox’s 3Q movie lineup seems much more promising: Good Bye Market Cap (Wbn) 505 Single (end-June), Key of Life (July), A Murderer's Guide to Memorization (August), Shares Outstanding (mn) 63 Beautiful Accident (August), and The Tunnel (September). Among them, Beautiful Free Float (%) 42.2 Accident (China release scheduled for August 12 th ) and The Tunnel (to be released Foreign Ownership (%) 8.0 during the Chuseok holidays) are deemed the company’s tentpole movies. Beta (12M) 1.03 52-Week Low 6,610 Maintain Buy and TP of W11,000 52-Week High 9,770 We reaffirm our Buy rating on Showbox. The lineup vacuum in 2Q will likely offer (%) 1M 6M 12M buying opportunities. In 1Q, the company already achieved 30% and 50% of its Absolute 10.6 10.1 5.9 2015 revenue and operating profit, respectively . The company will likely regain Relative 9.6 3.5 6.5 earnings momentum in 3Q, aided by the release of highly anticipated films in the domestic and Chinese markets. Of note, the company is likely to benefit from high 150 Showbox KOSDAQ operating leverage stemming from tight cost control in the event of the success of 130 films. 110 We maintain our target price of W11,000 , which we derived by applying a P/S ratio 90 of 3.8x (the high end of the ratio since 2014) to our 2016 revenue estimate. We 70 think the company will continue to enjoy a valuation premium, as it should deliver 5.15 9.15 1.16 5.16 structural overseas revenue growth on joint projects with overseas firms. Daewoo Securities C o., Ltd. FY (Dec.) 12/13 12/14 12/15 12/16F 12/17F 12/18F [Telecom Service / Media ] Revenue (Wbn) 107 72 141 154 159 162 OP (Wbn) 5 2 14 17 17 17 Jee -hyun Moon OP margin (%) 4.7 2.8 9.9 11.0 10.7 10.5 +822 -768 -3615 [email protected] NP (Wbn) 2 -2 12 13 13 13 EPS (W) 38 -27 187 204 204 209 ROE (%) 2.3 -1.6 10.6 10.6 9.8 9.3 P/E (x) 84.3 - 39.6 39.5 39.5 38.5 P/B (x) 1.9 2.8 4.0 4.0 3.7 3.5 Note: All figures are based on non-consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, Daewoo Securities Research estimates May 17, 2016 Showbox Table 1. Showbox ’s anticipated film lineup: Major films are concentrated in 3Q16 Release date Film Director Leading cast The Third Way of Love (China film , May 19 Lee Jae-han Song Seung-heon, Yoo Yeok-bi distribution in Korea ) Jun. 30 Familyhood Kim Tae-gon Kim Hye-soo, Ma Dong-seok, Kim Hyeon-su In July Key of Life Lee Gye-byeok Yu Hae-jin, Lee jun, Cho Yoon-hee In August A Murderer's Guide to Memorization Won Shin-yeon Seol Kyeong-goo, Kim Nam-gil, Seol Hyun Beautiful Accident (China film , Aug. 12 Ho Wi Ding Guey Lun-mei, Chen Kun, Wang Jingchun co -production ) Kim Seong - In September The Tunnel Ha Jeong-woo, Bae Doo-na, Oh Dal-su hoon Kwak Kyeong - In October Resurrected Victims Kim Rae-won, Kim Hae-sook, Seong Dong-il taek In November Vanishing Time: A Boy Who Returned Um Tae-hwa Kang Dong-won, Shin Eun-su, Lee Hyo-jae Han Seok -gyu, Kim Rae -won, Lee Gyeong - TBD The Prison Na Hyun young Notes: Release dates are tentative and subject to change; Showbox is believed to be the main investor and distributor for the films except The Third Way of Love and Beautiful Accident Source: Company data, Daewoo Securities Research Table 2. Quarterly earnings (Wbn, ‘000 persons) 1Q15 2Q15 3Q15 4Q15 1Q16 Revenue 24 13 66 38 44 Operating profit 2 0 9 3 7 Net profit 3 0 9 0 6 Number of admissions 7,410 2,730 18,190 8,610 12,480 (‘000 persons) Notes: All figures are based on non-consolidated K-IFRS, Source: Company data, KOFIC, Daewoo Securities Research Table 3. Annual earnings (Wbn, %) 2012 2013 2014 2015 2016F Revenue 88 107 72 141 154 Domestic – Film 77 91 54 122 120 screening Domestic – IP 8 9 14 15 18 Exports 2 4 3 5 14 Other 1 3 1 1 1 Operating profit 10 5 2 14 17 OP margin 11.0 5.1 2.5 10.2 10.8 Net profit -5 2 -2 12 13 Net margin -5.6 2.2 -2.4 8.3 8.3 YoY Revenue 21.5 -32.6 96.4 8.7 Domestic – Film 17.9 -40.7 126.1 -1.4 screening Domestic – IP 9.4 54.7 2.4 25.8 Exports 123.2 -29.6 66.9 200.0 Other 283.4 -58.8 -52.5 141.4 Operating profit -44.1 -66.5 696.7 14.8 Net profit TTB TTR TTB 9.2 Major assumptions Number of admissions 24,739 29,169 16,070 36,940 36,131 (‘000 persons) A Violent The Thieves, The Face Reader, Assassination, Prosecutor, Nameless KUNDO: Age of Major titles Mr. Go, The Throne, The Tunnel, Gangster: Rules the Rampant Secretly Greatly Inside Men Beautiful of the Game Accident Notes: All figures are based on non-consolidated K-IFRS, KOFIC, Daewoo Securities Research estimates Daewoo Securities Research 2 May 17, 2016 Showbox Table 4. Earnings forecast revisions (Wbn, W, %) Previous Revised % chg. NotesNotesNotes 16F 17F 16F 17F 16F 17F - Revised admissions and export Revenue 150 158 154 158 2.5 0.3 estimates Operating 16 16 17 17 3.5 3.6 profit Net profit 13 13 13 13 -1.9 -1.8 - Revised effective corporate tax rate EPS 211 209 204 204 -3.3 -2.4 Notes: All figures are based on non-consolidated K-IFRS Source: Daewoo Securities Research estimates Daewoo Securities Research 3 May 17, 2016 Showbox Showbox (086980 KQ/Buy/TP: W ) Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/15 12/16F 12/17F 12/18F (Wbn) 12/15 12/16F 12/17F 12/18F Revenue 141 154 159 162 Current Assets 166 182 193 205 Cost of Sales 117 127 132 135 Cash and Cash Equivalents 51 64 75 84 Gross Profit 24 27 27 27 AR & Other Receivables 17 19 19 20 SG&A Expenses 10 10 10 11 Inventories 0 0 0 0 Operating Profit (Adj) 14 17 17 17 Other Current Assets 98 99 99 101 Operating Profit 14 17 17 17 Non-Current Assets 48 51 52 53 Non-Operating Profit -1 0 0 0 Investments in Associates 16 18 18 19 Net Financial Income 1 0 0 0 Property, Plant and Equipment 2 2 2 1 Net Gain from Inv in Associates 0 0 0 0 Intangible Assets 0 1 1 1 Pretax Profit 13 17 17 17 Total Assets 214 233 246 258 Income Tax 1 4 4 4 Current Liabilities 98 107 110 113 Profit from Continuing Operations 12 13 13 13 AP & Other Payables 46 50 52 53 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 0 0 0 0 Net Profit 12 13 13 13 Other Current Liabilities 52 57 58 60 Controlling Interests 12 13 13 13 Non-Current Liabilities 0 0 0 0 Non-Controlling Interests 0 0 0 0 Long-Term Financial Liabilities 0 0 0 0 Total Comprehensive Profit 12 13 13 13 Other Non-Current Liabilities 0 0 0 0 Controlling Interests 12 13 13 13 Total Liabilities 98 107 110 113 Non-Controlling Interests 0 0 0 0 Controlling Interests 116 126 135 145 EBITDA 90 24 24 25 Capital Stock 31 31 31 31 FCF (Free Cash Flow) 84 32 27 26 Capital Surplus 36 36 36 36 EBITDA Margin (%) 63.8 15.6 15.1 15.4 Retained Earnings 49 59 68 78 Operating Profit Margin (%) 9.9 11.0 10.7 10.5 Non-Controlling Interests 0 0 0 0 Net Profit Margin (%) 8.5 8.4 8.2 8.0 Stockholders' Equity 116 126 135 145 Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/15 12/16F 12/17F 12/18F 12/15 12/16F 12/17F 12/18F Cash Flows from Op Activities 86 32 27 26 P/E (x) 39.6 39.5 39.5 38.5 Net Profit 12 13 13 13 P/CF (x) 5.0 20.8 20.8 20.4 Non-Cash Income and Expense 80 12 12 12 P/B (x) 4.0 4.0 3.7 3.5 Depreciation 0 0 0 0 EV/EBITDA (x) 4.0 15.6 15.0 14.1 Amortization 75 8 8 8 EPS (W) 187 204 204 209 Others 5 4 4 4 CFPS (W) 1,472 388 388 395 Chg in Working Capital -7 11 7 6 BPS (W) 1,858 2,012 2,166 2,325 Chg in AR & Other Receivables -10 -1 -1 0 DPS (W) 50 50 50 50 Chg in Inventories 0 0 0 0 Payout ratio (%) 26.7 24.4 24.4 23.8 Chg in AP & Other Payables 39 3 1 1 Dividend Yield (%) 0.7 0.6 0.6 0.6 Income Tax Paid 0 -4 -4 -4 Revenue Growth (%) 95.8 9.2 3.2 1.9 Cash Flows from Inv Activities -52 -14 -13 -14 EBITDA Growth (%) 76.5 -73.3 0.0 4.2 Chg in PP&E -2 0 0 0 Operating Profit Growth (%) 600.0 21.4 0.0 0.0 Chg in Intangible Assets 0 -8 -8 -8 EPS Growth (%) -